The sector reported at 49.7 points, lower than the average of the past year of 51 points.
A reading above 50 indicates that manufacturing is generally expanding; below 50 that it is declining.
New Zealand as a whole expanded with a score of 53.2.
Otago Southland Employers’ Association chief executive Virginia Nicholls said businesses were closely monitoring the Covid-19 outbreak.
"Some manufacturers have imported and/or exported higher amounts to and from China just before the coronavirus outbreak to work around the Chinese New Year shut-down," Mrs Nicholls said.
"This has given these businesses a breathing space, but there is concern that future orders will be affected."
She said others were scrambling to cope with the disruption to supply chains and the difficulty getting components into the country.
"Even if full production started tomorrow, there will be a significant hold-up before the supply chain flows again."
Businesses were looking to the Government for support, asking for wage subsidies like those offered to businesses affected by the Christchurch and Kaikoura earthquakes.
"This helped those businesses to keep them afloat to get through the recovery period. Some tax relief would also be appreciated. Training and redeployment would also be welcomed."
"We would also like to see some compensation for businesses and their employees if they are affected by quarantine requirements for employees who have been exposed."
Mrs Nicholls said stocks of finished products were up and production levels, new orders and deliveries of raw materials were the same.
Employment levels were in contraction.
The index also found supermarkets had had a lift due to panic buying and residential construction in Otago was strong.
Live seafood and forestry continued to be affected by the Covid-19 outbreak.
Mrs Nicholls said it appeared some staff in China were returning to work and exports there were being prioritised, but there was still supply chain congestion at ports and airports.
In Southland concerns continued over the long-term viability of the Tiwai aluminium smelter and the impact changes would have on the community there.
Prospects for an immediate start of free trade agreement negotiations with the UK were diminishing, as it focused on the EU and US negotiations.
BNZ senior economist Craig Ebert said New Zealand’s expansion might be the calm before the storm, but the fact it had gone up was interesting.
"I guess a lot of people might have been expecting it to fall into clear contraction territory and basically, it didn’t do that.
"The big issue is where that index is going to be over the coming months and what it will represent and of course we’re conscious of down side but for the moment it’s holding up."
Production, employment and deliveries of raw materials data was also all above 50.
Mr Ebert said globally, New Zealand’s results held up well. — Additional reporting RNZ
